ROI from Digital Transformation

When it comes to funding investment in cost-center functions like IT, efforts can often go underfunded because the ROI doesn’t meet the normal cost-justification hurdles. That’s because we are used to evaluating Productivity Zone investments on the basis of direct impact on the bottom line. 

Digital transformation poses a challenge to this mindset. It can, of course, reduce costs and improve productivity, but its real impact is in changing the power of your enterprise to compete successfully in an age of disruption. That means its ROI needs to be measured by power metrics, not just performance metrics. So, how can a CIO put the power equation clearly in view such that the enterprise makes better investment decisions in digital assets and services? And what are good metrics for calculating power ROI when applied to Productivity Zone investments? 

To bring the power equation into view, consider using the following diagram to determine what ends an investment in digital transformation is intended to meet:

Starting at the bottom of the pyramid, investments in modernizing infrastructure could include moving IT systems to a public cloud, outfitting remote workers with better conferencing and collaboration systems, or upgrading office facilities to be more team-friendly or health-conscious. None of these efforts would be expected to transform the enterprise externally. All instead are intended to make it more cost-efficient and productive. This is where the Productivity Zone should lead. The focus is on systems funded within cost-center budgets, and results are measured in terms of near-term bottom-line impact that is directly verifiable by the finance team.

Moving up the pyramid, investments in modernizing an enterprise’s operating model would include enabling consumption-based pricing, digital direct order processing of transactional purchases, automating customer support with AI-enabled chatbots, or creating a portal to allow customers to determine what assets, entitlements, and obligations they have under contract. These efforts are not about increasing enterprise efficiency so much as improving customer experience, with the Productivity Zone supporting the Performance Zone by delivering services that enable the latter to achieve their top-line objectives. The ROI comes from increased opportunities to expand the consumption of the existing products under contract, upsell and cross-sell additional products, as well as to reduce churn. Net Promoter Scores, retention statistics, and renewal rates are all relevant metrics here. Note that you are not measuring the digital transformation outputs for efficiency but instead for their impact on the effectiveness of the organizations consuming them.  For this reason, these digital transformation programs need to be sponsored by their Performance Zone consumers with internal contracts to ensure that the combined efforts of the two zones are generating the intended ROI.

Finally, at the very top of the digital transformation pyramid sit the most ambitious initiatives, the ones that are intended to get the enterprise into new lines of business and generate net-new revenue streams. These would include creating a marketplace for third parties to sell into your installed base, leveraging data assets to give them visibility and insights into their business processes, managing an infrastructure that heretofore was sold as a product, or converting a ubiquitous product presence into a platform upon which others could build additional value-adding offers. Each of these is a high-risk, high-reward undertaking that, if successful, will change the equity value of the enterprise. ROI here, in other words, comes ultimately in the form of a greater market cap, something that will not be measurable for some time to come, certainly not in the fiscal year the budget is being allocated. As the recipient of a great deal of this budget, the Productivity Zone has a key enabling role to play in such efforts, but these are Transformation Zone initiatives, and accountability for their ROI sits ultimately with the CEO, who must be supported by a village—in effect the commitment of everyone across the entire enterprise—to deliver the end result.

In short, there are three distinctly different sources of ROI attainable through digital transformation, each with its own accountability dynamics and metrics. The three do not blend well as they each deliver returns in a different time horizon—what we have been calling Horizon 1, Horizon 2, and Horizon 3, following McKinsey’s Three Horizons model—and they each call on different constituencies to take the accountability for achieving the intended outcomes. When it comes to funding digital transformations, in other words, it is best to pick one of the three outcomes and focus on getting that one over the finish line.

That’s what I think. What do you think?

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* Content originally published by Geoffrey Moore